Monday, January 05, 2015

Fifth Straight Distribution Day Kills Rally Attempt

Going into Christmas, Santa delivered a rally, but not anything you wanted under the Christmas tree. Outside of the huge rally day on December 17th, the first day of the rally attempt, volume dried up, and the market began to stall as it approached new highs. 

Over the past five days the Nasdaq has suffered five straight distribution days, including today, the SP 500 is working on its third straight distribution day, and the Dow Jones Industrial Average, the first to signal trouble ahead, has suffered five distribution days in the last six trading sessions.

Four to five distribution days in a two to three week time frame is enough to kill any rally attempt. But a cluster of distribution in a weeks time is a clear signal for investors and traders to clear out of the long side and consider shorting the weakest stocks in the market.


Leading growth stocks initially bounced and moved past their moving averages, but in anemic volume, and price performance lagged on a daily basis going into the end of the year, even as the market tried to push higher. Stocks like Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), appeared ready to run into their earning's reports after clearing or bouncing off their fifty day moving averages, but stalled almost immediately and started to drag the market lower daily, finally slicing back through their fifty day moving averages. The majority of other leading growth stocks barely reacted and lagged during the entire rally attempt. 
Not the type of action traders are looking for during a strong rally. 
Short trading ideas did a nice job tightening up into year end and began rolling over from their moving averages on Friday. Alert traders could have started initiating positions, and adding additional positions this morning on new setups. Foregin banks, UBS AG (OUBS), Credit Suisse Group (CS), and Deutsche Bank (DB), by far the weakest group, were the first to roll over. Continue to keep an eye on the gold (GLD) and silver (SLV) miners (DUST), as that trade is not completely dead yet. High end retailers Michael Kors (KORS) and Coach (COH) have also rolled over at key moving averages. Review the short trading ideas list for additional setups over the next few days.

Writing in my daily journal the same two statements on a daily basis, leading growth stocks lagging again and new setups trapping bulls in and triggering tight stop losses daily, most of the time in the same day, forced me to cash on December 31st, once several of my tighter stops to protect profits and control losses began to trigger. This is similar action we have experienced over the last few rally attempts where the market starts to kill traders by a death of a thousand cuts before rolling over into a new correction attempt.

Those who follow me on Twitter, StockTwits, SeekingAlpha, or LinkedIn, were alerted with the following post on December 31st: "Cash is the best position going into the New Year. Leading growth stocks behaving poorly."

Traders should be clearly out of any long positions, and investors can probably pack up their bags for a little while. In fact, long term investors could have spent the past few months on vacation.

The market may still attempt to rally into earning's season, but any attempt will most likely be lead by a narrow group of growth stocks that are expected to deliver strong earnings. The remainder of leading growth stocks are going to need several weeks, if not months, to consolidate and digest the two year, almost unabated, bull run.
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